Analysis & Opinion

WASHINGTON (Reuters) - The economy grew slower than initially estimated in the fourth quarter as government spending contracted more sharply and consumer spending was less robust, a government report showed on Friday.

Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

Federal Reserve officials have been concerned the economy is expanding too slowly to bring down unemployment significantly. The report supported the view that the central bank will complete its $600 billion government bond-buying program to further stimulate demand by lowering interest rates.

"A bit disappointing, but largely old news at this point that will take a back seat to fears about growth beyond the first quarter in the wake of both oil price hikes and a budget impasse that could cut into government spending," said Avery Shenfeld, an economist at CIBC World Markets in Toronto.

U.S. government debt prices pared losses on the data, while the dollar extended losses against the yen.

The government revised fourth-quarter growth to reflect a steeper contraction in government spending than previously estimated. Government spending declined at a 1.5 percent rate rather than 0.6 percent, due to weak state and local government outlays, and subtracted 0.31 percentage points from GDP.

In addition, consumer spending -- which accounts for more than two-thirds of economic activity -- grew at a 4.1 percent rate in the final three months of 2010 instead of 4.4 percent.

It was still the fastest since the first three months of 2006 and was an acceleration from the third quarter's 2.4 percent rate. But there are concerns that surging crude oil prices could hurt consumer spending and slow the economy's recovery.

The government revised business investment up, though spending on equipment and software was lower. Business spending increased at a 5.3 percent rate instead of 4.4 percent.

Business investment grew at a 10.0 percent pace in the third quarter. Spending on software and equipment increased at a 5.5 percent rate instead of 5.8 percent.

Business inventories subtracted 3.70 percentage points from GDP growth, unrevised from last month. Business inventories increased $7.1 billion instead of the $7.2 billion estimated last month.

Excluding inventories, the economy expanded at a 6.7 percent pace rather than 7.1 percent. It still marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 percent rate instead of 3.4 percent.

Exports were revised higher, but the upward revision to imports was even greater. Trade added 3.35 percentage points to GDP growth instead of 3.44 percentage points.

The report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at an unrevised 1.8 percent rate in the fourth quarter. That was a sharp gain from 0.8 percent in the third quarter.

But a "core" price index closely watched by the Fed advanced at revised 0.5 percent rate instead of 0.4 percent. The increase, which matched the third quarter, was still the smallest rise on record.